What is a credit builder loan in Canada?

Credit builder loans are designed to help you improve your credit score and put money aside for the future. All you need to do is make timely payments on your loan, which your lender will report to the credit bureaus. But be aware that, unlike traditional loans, you won’t be able to access your funds until you’ve paid your credit builder loan off in full. Once that happens, you’ll get a lump sum of cash that you can save or spend on whatever you want.

What is a credit builder loan?

Credit builder loans are designed to help you build your credit score by reporting all of your on-time payments to the credit bureaus. They’re usually targeted towards people with bad credit or no credit history and are typically offered by smaller financial institutions such as credit unions and private lenders.

When you sign up for a credit builder loan in Canada, you’ll agree to repay your loan amount before you get the money you borrow deposited into your bank account. This is to give your lender some security that they’ll have money to cover your loan if you default. It also allows you to get access to secured credit even if you don’t have an asset to put up against a secured loan.

Once you’re approved for a credit builder loan, you need to start making payments. Every on-time payment you make will be reported to the credit bureaus. These on-time payments should help to increase your credit score so that it’s easier for you to get more traditional forms of financing in the future. Once your loan is paid off, you’ll get access to the money you originally borrowed to spend on whatever you want.

Features of credit builder loans:

• Low amounts. Credit builder loans usually range between $500 and $5,000.
• Short terms. Most credit builder loans need to be paid back within a couple of months to less than two years, depending on which lender you borrow from.
• High interest rates. You may have to pay between 10% and 30% interest to secure a credit builder loan.
• Funds only issued when loan is paid off. You’ll typically only get access to the funds you borrow when you’ve paid off your credit builder loan in full.
• No deposit required. Unlike secured credit cards, credit builder loans don’t require a deposit to get started (so you won’t need to dip into your savings to get one).
• No assets required. You won’t be required to put up an asset such as your home or vehicle to secure this type of financing.

Where can I get a credit builder loan?

Credit builder loans aren’t as common as other types of financing, but you may be able to find them with the following providers:

• Big banks. Big banks may offer some version of credit builder loans by securing your funds in an account until you’re finished making your payments. At this point, you can spend the money from your loan or keep it in your savings.
• Credit unions. Many credit unions offer credit builder loans for a small fee. Just be aware that you’ll typically need to sign up as a member with a credit union to take advantage of any of its loan products.
• Online lenders. Online lenders are a good place to start when you want to rebuild your credit online. You can sign up from the comfort of your own home and you’ll be able to compare interest rates to find the best deal.

What can a credit builder loan do for me?

A credit builder loan can help you take control of your finances in the following ways:

• Helps you build or rebuild your credit. Your credit score will go up as you make on-time payments.
• Gives you access to better rates. As your credit score goes up, you’re more likely to be eligible for competitive interest rates on future traditional loans.
• Teaches you how to budget for payments. Taking out a credit builder loan can help you learn how to budget and practice good savings habits.
• Gives you the chance to grow your savings. You’ll get access to a lump sum of cash when you make your final payment, which can then be deposited into your savings.

When should I take out a credit builder loan?

You should only take out a credit builder loan if you feel like this could help you to rebuild your credit and set aside some much-needed savings. You might benefit from this type of loan if you meet any of the following criteria:

• You have bad credit

  Credit builder loans can help you build up your credit score if it doesn’t meet the threshold of “good” (usually less than around 670 points). This can help you qualify for financing from traditional lenders with competitive interest rates. It can also help you avoid predatory lenders and exorbitant rates.

• You struggle to save money

  If you have trouble putting money away without spending it, a credit builder loan could help you reach your savings goals faster. With this type of loan, you won’t have access to your money until you pay your loan off. This means that you’ll get a windfall of savings at the end of your term that you can either re-invest or spend however you want.

• You want to rebuild your credit score faster

  You’ll be able to rebuild your credit score faster with a credit builder loan. This is because your lender will report all of your on-time payments to the credit bureau. Not all lenders do this, so it will help to rebuild your credit much faster than with a traditional loan. Once you get your score above 670, you’ll find it much easier to qualify for loans and credit cards with more favourable interest rates.

• You're trying to recover from bankruptcy or a consumer proposal

  You might be able to benefit from a credit builder loan if you’re recovering from bankruptcy or a consumer proposal. Getting this type of loan can help you rebuild your credit report over time, even if your “bad credit” flags stay on your file for up to seven years. Once you’re out of the woods, you’ll be in better shape financially and you may be able to qualify for more loans and better rates as a result.

• You want to purchase your first home

  You’ll want to have the highest credit rating possible when you apply for your first home. This will help to make sure that you get the best possible rates on your mortgage. Getting a credit builder loan before you apply can help you to get your credit up to a place that will let you get the best deal on your home loan.

• You've been rejected for unsecured financing.

  If you can’t seem to get approved for unsecured financing, it could mean that the only way to rebuild your credit is through secured financing. This could take the form of a secured credit card or a credit builder loan. It could also mean you need to put up assets (like your home or vehicle) against any loan you take out to get approved.

• You don't have any credit history

  If you have no credit history at all, it could be worthwhile for you to start building up your credit as soon as possible. The only way you’ll probably be able to do this is through a secured form of financing. A credit-builder loan can be a particularly good resource for this since it will help you to build up your credit report much faster than a traditional loan might.

How much will I pay for a secured savings loan or credit builder loan?

The amount you’ll pay for this type of loan is a point of contention among many borrowers since savings and credit repair loans charge interest and additional fees on any amount you borrow. With interest rates over 20% APR, this means you could end up paying $100 more per year on a $500 loan.

While these loans do cost more than what you would pay to simply transfer your loan payments directly into a savings account, they can be a good solution for people who have trouble staying accountable to their finances without external support.

And while you won’t save money upfront with these types of loans, you may be able to save money indirectly. This is because rebuilding your credit can help you get more favourable rates on future loans. You may also be more likely to keep your savings in a secured account over the long term if this is set up for you in advance.

How do I manage a credit builder loan?

You can easily manage a credit builder loan in Canada with the following tips:

• Make a budget. Start by making a budget to figure out how much you can afford to spend on loan payments each month.
• Borrow a small amount. Borrow a small amount to keep your loan payments manageable and cut down on how much interest you have to pay.
• Pick a shorter term. Look for the shortest term available with monthly payments you can afford in order to pay your credit builder loan off quickly.
• Search for low interest rates. Look for low interest rates before you sign up so that your monthly payments stay affordable and you can put more down on your principal.
• Set up direct debit. Set up an automatic withdrawal from your bank account so that your bills get paid automatically.
• Make sure you maintain your payments. Keep up with your payments every month to ensure that only on-time payments get reported to the credit bureaus.
• Keep an eye on your credit score. Get a copy of your credit score before you start the loan process so you’ll know how far you’ve come when you pay off your loan.

Benefits and what to watch out for

How can a credit repair loan help me improve my credit score?

This type of loan can help you to improve your credit score because your on-time payments will typically be reported to the credit bureau as soon as you make them. This means that your score will go up by a small fraction every time you put money onto your loan.

The only way your credit score won’t go up while you’re paying off a savings or credit repair loan is if you have other outstanding debts that are being left unpaid. For example, if you’re missing credit card payments or mortgage payments because you’re paying off your savings loan, then your credit will continue to go down.

How to apply for credit builder loans

You can apply for a credit builder loan in Canada by following these steps with most lenders:

Application process

1. Visit your lender’s online website to fill in an online application. This should take only a couple of minutes.
2. Input personal information such as your full name, date of birth, address, phone number and email.
3. Provide financial details such as your bank name and transit number.

Loan eligibility requirements

To qualify for a credit builder loan in Canada, you may need to meet the following eligibility requirements:

• You must be at least 18 years old or the age of majority in your province or territory.
• You’ll need to be a Canadian citizen or a permanent resident with a valid Canadian address and two valid pieces of identification.
• You must be able to demonstrate that you can pay off your loan by showing pay stubs, tax statements and other financial documents.
• You’ll usually need to have a bank account to apply for a loan online.

Required documents and information

• Government-issued ID. You may have to show proof of ID, such as your driver’s licence or passport.
• Proof of address. You’ll likely need to show that you have a permanent address by providing a utility or phone bill.
• Proof of income. You may be required to show documents like pay stubs or letters of employment to prove that you have a steady job.
• Bank statements. It’s possible that you’ll need to show your bank statements to demonstrate that you have money coming in to cover your payments.

What other options are available for bad credit financing?

If you can’t afford to wait for your credit builder loan to mature to improve your credit or get financing, you have other options. These include:

• Secured credit cards. Secured credit cards work just like regular credit cards but the money on them is secured by a deposit you make in advance. These cards can be useful to build up your credit score, but they won’t give you access to “credit” in the sense that the money you spend comes out of your deposit.
• Short-term loans. Commonly known as payday loans, these loans let you access small amounts of money to get over a financial hump. Just keep in mind that these loans come with extremely high interest rates and should be avoided wherever more affordable options exist.
• Bad credit personal loans. Bad credit lenders look beyond your credit history to your income and financial status when determining whether you can afford repayments. You can usually access both installment loans and single payment loans with bad credit lenders and borrow money with or without collateral.
• Apply for a low-interest credit card. It might make more sense to get a low-interest credit card so that more of your payment goes towards your principal. Compare your low-interest credit card options here.
• Get a co-signer on your loan. You might benefit from having a co-signer with a good credit score help you to secure financing at affordable rates.
• Credit counselling. You might like to use a credit counselling service in your city to look into how you can build up your credit score without having to take out another loan.
• Borrowing from loved ones. Asking for a no-interest loan from family or friends could be a good option to clear out your debt if you don’t owe very much

Like other forms of credit, these options require you to pay back your debts on time through monthly, bi-weekly or weekly repayments. If you make a late payment or miss one, it can negatively affect your score. Make sure you can afford to take on extra debt before you agree to a loan, otherwise you could find yourself in a worse financial state than when you started.

Get your credit score and repair your credit

Compare the providers below to access your credit score and access services to repair your credit.

Bottom line

Credit builder loans can be a useful way to rebuild your credit and get back on track with your finances. Every on-time payment you make is reported to the credit bureaus to help increase your credit score. The main downside of these loans is that you can’t access the funds you borrow until you make your last payment. It can also be difficult to find a reputable lender offering credit builder loans with competitive interest rates.

Frequently asked questions

• How long will it take to improve my credit score?

  You could see an improvement in your credit score within six months to a year of taking out a credit builder loan in Canada. The increase in your score may be small – typically only 20 to 25 points. That said, even a few extra points on your score can make or break your next loan application.

• Can I pay off my credit builder loan early?

  It depends on your lender. You may be able to pay your loan off early but it might make sense to pay it off over time. This is because the fewer payments you make on your loan mean less improvement to your credit score.

• Can I qualify if I'm struggling with bankruptcy or a consumer proposal?

  With some lenders, yes. Credit builder loans often don’t rely on credit checks so you can usually apply no matter the state of your credit. Just be aware that a bankruptcy or consumer proposal will stay on your credit report for many years, and it can be difficult to repair your credit with this mark on your credit history (no matter what actions you take).

• How much does a savings loan or credit repair loan cost?

  You’ll usually pay over 20% interest on your savings loan or credit repair loan in addition to extra fees you might have to take on to cover sign-up or administrative expenses.

• Is a secured savings loan or credit repair loan right for me?

  It depends on your financial situation. If you want to get your credit score back up, it might make sense for you to take out this type of loan. It might also be a good fit if you’re not disciplined with your savings and want a way to put money aside without having to worry about dipping into your funds early.

• What type of account will my loan be held in?

  Your loan will be held in a secured savings account, usually in a guaranteed investment certificate (GIC). This is an account that you won’t be able to access before a certain amount of time has passed.

• Will I make interest on my loan while it's in savings?

  This depends on where your loan is held as well as what the terms of your loan contract are. You’ll typically need to negotiate this with your lender.